Tax Tip 28: Selling an IP to pay down non deductible debt

Sometimes it may be worthwhile to sell an investment property as the proceeds can be used to debt recycle - pay down the non deductible debt and reborrow to invest.

Property is generally only a good asset to hold when it is leveraged. A $1million property may return about 3% in rent pa. So once you have a low LVR you can possibly use that equity which is tied up to invest further. You can simply borrow against the property, but interest on any loan taken out to do this would be deductible against the income the borrowed money is used for.

e.g $1mil property with a $100,000 loan

Increase the loan to $800,000 to invest in shares. The interest on the extra $700k borrowed is deductible against the shares, not the rent of that property.

This means you are still lowly leveraged against the property. You could sell it use the money to pay down the PPOR loan, pay the CGT and borrow against this to buy the shares.

A property owned may also be a dud - sometimes it is best to get rid of a dud and invest in something better.

There may also be structure issues with potentially mixed loans and other deductibility of interest stuff ups.

land tax may be high too and selling and buying again could help you save a fortune in land tax.

Combine any of the above reasons with a period of no or low income could mean any CGT may be minimal. There are also other strategies which could be used to reduce the CGT.

You just have to weigh up all the reasons and then run the numbers and see how much better off financially you could be if you sold that property.

Work out

Selling costs

CGT

Interest saved on the main residence loan

Tax savings one the new loan

Purchase costs of the new property

Your ability to borrow again

Once you have worked out the costs then work out how long it would take you to recoup those costs and then assess if it would be worthwhile to sell and buy again.

If you could save $10,000 per year in tax, but it would cost you $80,000 upfront would it be worth it - this sort of thing.

And ensure YOUR tax calc is correct. Its not unusual for taxpayer estimates to be inaccurate both too high or too low eg fail to reflect possible exemptions (6 yr absence, Main re etc) or even loss of CGT discounting.

I see some taxpayers assume their tax will be far higher than it is. Make decisions based on facts and be prepared to pay for advice to confirm it.

Increase the loan to $800,000 to invest in shares. The interest on the extra $700k borrowed is deductible against the shares, not the rent of that property.
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There may also be structure issues with potentially mixed loans

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Subtle yet important point here... the $800k loan would be entirely for income-producing purposes, however the purpose is mixed 1:7 IP:shares. My accountant said that this still needs to be apportioned, and becomes extra messy if e.g. the property is under joint ownership while the shares are under single ownership.

Have been advised that it's best to have a separate SVR+offset or LOC for each different purpose/ownership ratio.

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